The outcome from this weekend’s Australian election remains too close to call. This uncertainty and lack of a clear majority has had a mild negative influence on the AUD/USD at the open. On Friday, the currency pair was one of the G10 top performers, closing at 0.7498, but now its trades 0.5c lower at 0.7448. All that said if history is any guide, parliamentary elections do not typically have a lasting effect on the outlook of the economy or the currency.

Risk assets closed Friday on a positive note, aided by the expectations of a lower for longer yield environment as major central banks grapple with the added uncertainty from Brexit while at the same time a sense of calm has also been a factor, courtesy of the UK political vacuum which is not expected to be resolved until early September.

Amid low trading volumes ahead of a long holiday weekend, US equities ended the week higher with the S&P500 up 0.19% for the day (closing at 2102.95) and 3.2% for the week. On the other side of the Atlantic, the FTSE100 rose smartly on Friday (1.3%) and at 6577.83, it is now 240 points higher than where it was pre Brexit levels (3.8% higher for the period).

In Bonds, 10y UST briefly traded to a new historical low (1.385%) before recovering later in the session to end the week at 1.441%. Meanwhile 30y UST and10y UK Gilts closed at new historical lows, 2.225% and 0.863% respectively.

The uncertainty post Brexit has increased expectations of further easing by some central banks and in the case of the Fed, delay any hikes over the short to medium term. These factors have contributed to the move lower in core global yields and it will be interesting to see to what extent a strong US payrolls report on Friday changes this perception.

On this point, the solid ISM manufacturing print (53.2 vs 51.4 exp) coincided with the move higher in UST yields on Friday’s overnight session. Notably, as well, at 50.4 the employment sub index was back above the break-even line.

As for currencies, the fall in long dated UST yields and an increase in risk appetite appear to have weighed on the USD. Excluding GBP, all other G10 currencies outperformed the big Dollar on Friday. JPY was at the top of the leader board, up 0.66% followed closely by the NZD (0.51%) while the AUD is unchanged, following the “election correction” this morning. GBP’s underperformance could probably still be attributed to Thursday’s comments from BoE Carney that ‘some monetary easing will likely be required over the summer’.

As for commodities, WTI and Brent oil closed higher on Friday (1.82 and 1.67% respectively), no doubt aided by a softer USD. Gold was up 1.52% and iron ore retraced some of its early week gains (-2.39%) to close the week at $54.33.

In an interview on CNBC, Fed Deputy Chair Fischer sounded cautious and gave the impression the Fed is on a wait and see mode noting that May’s payrolls was ‘a cause for concern’. Meanwhile, speaking in London, Fed Mester said that risks and uncertainty have increased after the UK’s referendum and she also noted that one mechanism in which Brexit could affect the US economy is through USD appreciation, which could dampen US export growth and delay inflation’s return to 2%.

Bundesbank Weidmann said the EU should give the UK a quick and fair exit deal and although the UK leaving the EU could slow growth in the EZ, he does not see the need for further stimulus at this stage.

Sunday’s CoreLogic RP Data weekend auction summary shows that 70.7% of capital city auctions held this week were successful, a decent rise compared to the previous week’s clearance rate of 66.4%, albeit against a substantially lower number of auctions (811 vs 2,218 prev). Melbourne cleared a preliminary 71.6% of auctions, up from 67.3% prev. and Sydney cleared 80.4%% up from 73.5% prev

Coming Up

A quiet start to the week is expected with the US celebrating Independence Day on Monday and the RBA unanimously seen on hold Tuesday. As such focus for the week is likely to be on Friday’s US payrolls with the market looking for confirmation that the May’s weak print was an aberration and not the start of a new soft trend. Ahead of payrolls, on Wednesday we get the June FOMC Minutes along with US non-manufacturing ISM. As for central bank speakers, Fed Dudley and Tarullo are on the roaster this week and BoJ Kuroda speaks on Thursday. Today in Australia we get Building Approvals (May) and Melbourne Institute Inflation (Jun).

Overnight

On global stock markets, the S&P 500 was +1.55%. Bond markets saw US 10-years -2.56bp to 1.44%. In commodities, Brent crude oil -0.80% to $50.55, gold+1.7% to $1,345, iron ore +0.8% to $54.33. AUD is at 0.7446 and the range since Friday 5pm Sydney time is 0.7444 to 0.7502.

About the Author

Rodrigo is a Currency Strategist and member of the FX strategy team at NAB. In this role, he contributes to the creation of trade ideas and research publications, and advises our internal and external clients on developments in global foreign exchange markets.

Rodrigo has lived and worked around the world. Before coming to Australia, he worked in London for Henderson Global Investors, firstly as the Head of Risk Measurement and then as a Quantitative Analyst in the Global Fixed Income Hedge Team. In 2009, Rodrigo made his move to NAB as an investment strategist within the private wealth division. He then worked in Rate Strategy for four years, before taking on his role today as Currency Strategist.

Rodrigo was born in Chile, and holds a Bachelor of Commerce, Honours and Masters in Economics from the University of the Witwatersrand in South Africa. He’s also a CFA charter holder, and has a diploma of Financial Markets (AFMA).

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